[Q&A] Saechulbal Fund, Detailed Criteria for Borrowers at Risk of Default Not Disclosed

[Asia Economy Reporters Song Hwajeong and Lee Eunju] Financial authorities held a briefing for the financial sector and disclosed the operational plan for the New Start Fund. To dispel the moral hazard controversy that had been raised regarding the New Start Fund, debt restructuring will be conducted only for self-employed individuals and small business owners affected by COVID-19, and principal reductions will be granted only when debt exceeds assets, thereby strengthening the criteria. However, to prevent applications for the New Start Fund that meet the criteria but pose a risk of default, detailed standards for borrowers at risk of default will not be disclosed externally.

On the 18th, the Financial Services Commission summarized the operational plan for the New Start Fund in a Q&A format.

Who can apply?

Small business owners and self-employed individuals affected by COVID-19 can apply for debt restructuring. A distinctive feature of the New Start Fund is that both individual business owners and corporate small business owners who have overdue credit debt, secured debt, and guarantee debt can apply. Other debt restructuring programs, such as those by the Credit Guarantee Fund, mostly allowed applications only for credit debt.

However, this reflects the reality that self-employed individuals affected by COVID-19 mostly operate their businesses by taking loans secured by their business premises or other assets. The fact of being affected by COVID-19 must be proven through the National Tax Service by verifying whether sales decreased during the relevant period. However, since this program does not provide significant benefits, the proof requirement will not be enforced strictly.

Is it true that debt can be reduced by up to 90%?

Yes, but this applies only to a very small number of cases. Among credit debtors who have overdue debt for more than 90 days and have credit issues, only vulnerable borrowers qualify. Vulnerable borrowers include basic livelihood security recipients, low-income persons with severe disabilities, and seniors aged 70 or older, so they represent a very small portion.

Debt reduction is limited to credit debtors only. Up to 80% of the debt can be reduced, considering the presence of assets. Debtors can receive principal reductions only on their net debt (debt minus assets). Up to 80% of the net debt exceeding assets can be adjusted. Principal reduction is not available for secured debt.

Can borrowers at risk of default with less than 90 days overdue have their debt forgiven?

No. In such cases, the debt is not forgiven but restructured. This means interest rates may be reduced or repayment periods adjusted. Since these borrowers are capable of normal financial transactions, the aim is to prevent them from becoming financial delinquents and to support them in repaying principal and appropriate interest on their own.

Are there any disadvantages if debt restructuring is granted?

The purpose of rescuing borrowers overdue for more than 90 days is to relieve them from harsh collection difficulties. Therefore, overdue information for long-term overdue borrowers (over 90 days) will be removed. However, they will be registered as ‘public information,’ so financial institutions will know for two years that the borrower is undergoing debt restructuring.

For borrowers at risk of default, short-term overdue information will be removed, and no particular disadvantages will be imposed. When applying for debt restructuring, short-term overdue information is removed and collection stops. In principle, they are not registered as public information, so no credit disadvantages occur.

When can applications be submitted?

Financial authorities plan to implement the policy from late September. Applications can be accepted for three years after the policy is implemented. The New Start Fund allows applications not only for those who have already experienced defaults during a specific past period but also for those who may experience defaults in the next three years. However, applicants must wait six months after receiving a loan before applying for the New Start Fund. Applications can be made only once.

What procedures must applicants follow?

Applicants should apply for debt restructuring through the Credit Recovery Committee. The committee informs the financial institutions holding the claims of the applicant’s details and shares the expected debt restructuring plan. The financial institutions then decide whether to transfer the claims to Korea Asset Management Corporation (KAMCO). If the financial institution decides not to transfer the claims and to execute debt restructuring independently, it can do so with the debtor’s consent without transferring the claims to the New Start Fund. If both the debtor and the financial institution agree to transfer the claims to the New Start Fund, the debtor will follow the New Start Fund’s restructuring procedures.

However, debtor consent is required only for ‘borrowings at risk of default.’ For claims overdue more than 90 days, financial institutions can sell the claims to the New Start Fund without the debtor’s consent.

What is the maximum amount of debt restructuring available under the New Start Fund?

The initial maximum debt restructuring limit was 3 billion KRW. However, considering moral hazard concerns, the maximum restructuring limit will be lowered. The Financial Services Commission plans to open an online platform called ‘saechulbalgigeum.kr’ next month, where debtors can check their eligibility and apply independently.

From the perspective of savings banks, borrowers at risk of default are regular customers, and if the threshold for default borrowers is set at the bottom 10-20%, many normal customers would be included. What about this?

In the secondary financial sector, a few days of overdue is considered normal, whereas in banks it is not. When borrowers at risk of default enter, the adjusted interest rate will be set above the funding cost rate to reflect concerns from the secondary financial sector. Although detailed criteria for borrowers at risk of default, such as bottom credit score percentages and days overdue, are being discussed, the final plan will not be disclosed. If detailed criteria are revealed, debtors might apply for the New Start Fund based on those criteria, so the plan is to allow eligibility checks via an algorithm.

The application period is three years, but while the direct impact of COVID-19 damage can be seen until next year, is it questionable to consider damage after next year as COVID-19 related? Is the implementation period too long?

Although COVID-19 damage occurred over two and a half years, borrowers’ ability to endure damage varies. Some may barely survive as principal and interest suddenly increase in a normal cycle. The three-year period was set assuming that the issue will be resolved within that time. It includes not only those who collapse as of the implementation date but also those who barely survive and may collapse later.

It was said that strict screening will be conducted, including invalidation if assets are hidden. Can assets such as a spouse’s property or cash held in a safe be found?

Asset verification will be conducted using the National Tax Service network, which has been maintained for 20 years by the Credit Recovery Committee and KAMCO. Since these two institutions are highly capable in debt restructuring, there is no need to worry about this aspect.

The timeline until implementation is tight.

The target for detailed implementation is late September. The Credit Recovery Committee and KAMCO are preparing accordingly. However, since agreements must be made with 6,000 financial institutions and IT systems established, it is uncertain whether this can be completed exactly by September. If negotiations are delayed or other issues arise, the schedule may be postponed, but the working-level staff are preparing for implementation by the end of September. It is expected that unexpected confusion such as system downtime may occur at the start. To minimize disruption, a preparation and response team will be activated with related organizations and associations around the implementation period.